A contrarian play may be forming in the Canadian Dollar

Key points

• The Canadian Dollar has declined significantly in recent years
• All of the actual or perceived fears regarding "trade wars" have pushed trader sentiment to near-record lows
• On the contrarian front, price action is presently testing a historically key level, and seasonality will soon be entering its most favorable time of year - i.e., a favorable opportunity may (finally) be setting up

The Canadian Dollar has been beaten down over many years

The scope of the devastation the Canadian Dollar has absorbed in recent years is easily discerned in the chart below.

Since peaking in 2007, the CD declined almost 37% before potentially bottoming out in January 2025. The CD is 27% below its 2014 high, 17% below its 2021 high, and plunged almost 8% from September 2024 into late January 2025. There is no way to say anything positive about the CD on a trend-following basis.

However, from a contrarian point of view, a potential opportunity could be forming. First, note in the chart below that the Canadian dollar has historically spent very little time - and has not fallen very far below - 0.6850. 

The CD bottomed near 0.6850 in 1986 before reversing higher. It then spent about five and a half years below that level - from 1997 to 2003. Note, however, that in the past 54 years, that is the only time it has spent below that key price level. 

In the past decade, sharp declines toward the 0.6850 level or just below marked the end of declines in 2016, 2020, and potentially again in December 2024. In theory, a contrarian trader could justify establishing a long position in the Canadian Dollar now and placing a stop-loss below 0.6850 (that is not a "recommendation," only a recognition of an objectively identifiable "line in the sand.") 

The bottom line regarding price action: There is no guarantee that 0.6850 will hold, but as long as it does, potentially good things could happen.

In addition to price action, let's consider trader sentiment. The green line in the chart below represents the 200-day moving average of our Canadian Dollar Optix indicator. At the far right, we see that this value is hovering near its all-time low. This does not in itself guarantee a reversal, but it does signify the potential that a contrarian bullish play may be forming.

Seasonality could turn the tide in favor of the Canadian Dollar

The chart below displays the annual seasonal trend for the CD.

The tendency for early-year weakness followed by springtime strength is pretty evident in the chart above. But how consistent are these tendencies? Let's take a closer look.

The chart below displays the hypothetical dollar return from holding a long position in Canadian Dollar futures from the end of Trading Day of the Year (TDY) #3 through TDY #60 every year since 1971. For 2025, this period ends on 2025-03-25.

The table below summarizes CD performance. 

Now, let's consider the favorable period highlighted in the green box in the chart above. This period extends from TDY #60 through TDY #87. For 2025, this period begins at the close on 2025-03-25 and runs through 2025-05-01.

The chart below displays the hypothetical gain from holding a long position in Canadian Dollar futures only during this period every year since 1971.

The table below summarizes performance.

A 63% Win Rate is far from a "sure thing." So, anyone considering a long position in the Canadian Dollar must have a stop-loss point in mind when doing so. Still, note that moves of $2,000 or more have historically skewed to the plus side 11-to-2.

What the research tells us…

Traders are encouraged to keep a close eye on the Canadian Dollar as March unfolds for a potential contrarian bullish play. A bullish case can be made as long as this currency holds above 0.6850. This will become particularly true when the next favorable seasonality period starts in late March.